State and Local Tax Greater Than $10,000: What It Means for Your Taxes

State and local taxes (SALT) can take a significant bite out of income, particularly in high-tax states. While taxpayers once could deduct the full amount on federal returns, recent limits have reduced how much can be written off, impacting those with substantial property, income, or sales taxes.

Federal SALT Deduction Threshold

The federal SALT deduction is capped at $10,000 for single filers, heads of household, and married couples filing jointly. Married individuals filing separately face a $5,000 limit. Introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, this cap significantly reduced deductible amounts compared to prior years when no limit existed. Unless Congress enacts changes, the restriction remains in effect through 2025.

This limit affects taxpayers who itemize deductions rather than taking the standard deduction, which the TCJA nearly doubled—$13,850 for single filers and $27,700 for married couples in 2023. Many now find it more beneficial to take the standard deduction. However, for those with high property or income tax bills, the SALT cap increases taxable income.

The cap applies to a combination of state and local income taxes, property taxes, and sales taxes. Taxpayers must choose between deducting state and local income taxes or sales taxes, but not both. In states with no income tax, such as Florida or Texas, residents may still benefit if they have significant sales tax expenses. However, the $10,000 limit often prevents high earners from deducting their full tax burden.

Applicability in High-Tax States

States with high income and property taxes, such as California, New York, New Jersey, and Illinois, feel the greatest impact. Residents in these states frequently pay well above the $10,000 threshold, meaning a large portion of their tax payments offer no federal deduction benefit.

For example, a New York City resident earning $200,000 could owe over $12,000 in state income taxes alone before considering property taxes. Since the deduction limit is fixed, any amount beyond $10,000 provides no additional tax relief.

Local tax structures also shape how residents feel the cap’s effects. In California, where the top state income tax rate is 13.3%, even middle-income earners can exceed the deduction limit. In Texas, where there is no state income tax, high property tax rates—often exceeding 2% of a home’s value—can still push homeowners past the cap. A $600,000 home in Dallas could generate an annual property tax bill exceeding $12,000, leaving part of it non-deductible.

More than 30 states have introduced workarounds to mitigate the cap’s impact. Many now offer pass-through entity (PTE) tax regimes, allowing business owners to pay state taxes at the entity level rather than individually. This keeps the tax burden at the business level, where it remains fully deductible federally. However, this strategy helps business owners, not W-2 employees, who must absorb the full effect of the deduction cap.

Filing Methods and SALT Treatment

The way taxpayers file their returns influences how state and local taxes are handled. Sole proprietors, partnerships, and S corporations may have options unavailable to W-2 employees. Many states offer pass-through entity (PTE) tax elections, allowing business owners to pay state taxes at the entity level rather than personally. Since business expenses remain deductible without the $10,000 cap, this can effectively bypass the SALT limitation. In California, for example, electing the PTE tax allows owners of pass-through businesses to deduct their full state tax liability federally, reducing taxable income beyond what an individual filer could claim.

Real estate investors also have distinct considerations. Rental property owners can deduct state and local taxes related to rental properties as a business expense rather than as an itemized deduction. This means a homeowner may be subject to the SALT cap for their primary residence, while a landlord can fully deduct property taxes on rental units. An investor with multiple properties in New Jersey, for instance, could deduct tens of thousands in property taxes that a typical homeowner cannot.

Retirees and remote workers with flexibility in choosing a state of residence may benefit from strategic relocation. Moving to a state with no income tax, such as Florida or Nevada, eliminates state tax liability on wages and retirement income, reducing the impact of the SALT cap entirely. Some taxpayers establish residency in tax-friendly states while maintaining secondary homes in high-tax jurisdictions, though this requires meeting strict residency requirements to avoid dual taxation. States like New York and California closely scrutinize such arrangements, using factors such as voter registration, driver’s licenses, and the number of days spent in the state to determine tax residency.

Where SALT Deductions Appear on Returns

State and local tax deductions are reported on Schedule A of IRS Form 1040, which is used for itemizing deductions. Within Schedule A, taxpayers enter their deductible state and local income taxes, property taxes, or general sales taxes, ensuring the total does not exceed $10,000 ($5,000 for married filing separately).

While this limit applies to personal taxes, business-related state and local taxes, such as those reported on Schedule C (for sole proprietors) or Schedule E (for rental properties), remain fully deductible. This distinction depends on the income source.

The impact of SALT deductions extends beyond federal returns, as many states conform to or deviate from federal itemization rules. Some states, like California, allow full deductibility of state and local taxes on their own returns, meaning taxpayers can still benefit from itemizing at the state level even if they take the standard deduction federally. Taxpayers must carefully compare their federal and state tax benefits to optimize their overall tax outcome.